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State and local tax advisor: May 2025

Authors: Mike Merkel, Ron Cook, Jeanette Tolar, Stephen Palmer

May 27, 2025 / 27 min read

Have you heard about the latest changes in state and local taxes? Check our May 2025 roundup here.

The states covered in this issue of our monthly tax advisor include:

Alabama

Corporate, personal income taxes: Certain nonresidents exempt from income tax

The Alabama legislature has enacted legislation exempting certain nonresidents from its income tax. Effective Jan. 1, 2026, nonresident individuals are exempt from Alabama income tax if they meet the following criteria:

Act 2025-334 (H.B. 379), Laws 2025, effective Oct. 1, 2025.

Corporate, personal income taxes: Research expenditure amortization decoupled from TCJA

Alabama has enacted legislation that decouples Alabama from the Tax Cuts and Jobs Act (TCJA) provision related to the amortization of research and experimental expenditures for income tax purposes. For tax years beginning on or after Jan. 1, 2024, taxpayers may either currently deduct research and experimental expenditures or treat them as deferred expenses, as allowed before tax year 2022.

Act 2025-400 (H.B. 163), Laws 2025, effective May 14, 2025.

Arkansas

Corporate income tax: Sourcing of income for services and intangibles changed to market-based approach

For purposes of apportionment for corporate income tax purposes, Arkansas has amended sourcing rules for sales of services and intangible property from income-producing activity to a market-based approach. Providers of telecommunications services, internet services, community antenna television service, cable television service, or direct-to-home satellite television service, may elect to use the income-producing activity sourcing method until Dec. 31, 2035.

The department is authorized to issue rules for determining alternative allocation and apportionment methods, which must be applied uniformly. The same burden of proof applies whether the taxpayer petitions for the alternative method or the secretary requires use of an alternate process. If the secretary requires an alternative allocation or apportionment method, they may not impose a civil or criminal penalty relating to tax due that derives from the taxpayer’s reasonable reliance on the statutory allocation and apportionment provisions.

The income of a nonresident corporation or partnership with no physical presence in Arkansas is subject to tax if the nonresident’s Arkansas receipts exceed $250,000 in the current or the immediately preceding year.

Act 719 (S.B. 567), Laws 2025, effective 90 days after adjournment of the 2025 Legislature, for tax years beginning Jan. 1, 2026.

Colorado

Multiple taxes: Tax credits and exemptions modified

Colorado has enacted changes to various tax credits and exemptions to better align expenditures with the General Assembly’s intent, improve efficiency, reduce administrative burdens, and conform Colorado’s tax code with provisions commonly used in other states. Key changes include:

H.B. 1296, Laws 2025, effective Jan. 1, 2026, except as noted.

Corporate, personal income taxes: SALT parity act guidance updated

Colorado issued updated guidance on the state’s SALT Parity Act, which allows electing pass-through entities (PTEs) to pay Colorado income tax at the entity level. The updated guidance clarifies that nonresident individuals aren’t required to file a Colorado return if their only Colorado-source income is included in the return filed by an electing PTE.

It also discusses the effect of lower-tier partnership SALT Parity Act elections on tiered partners. A SALT Parity Act election made by a lower-tier partnership has no effect on a tiered partner’s return, except with respect to the Colorado K-1s the tiered partner issues to its partners or shareholders. A tiered partner can’t claim any credit or subtraction, or make any other adjustment on its return, based on a SALT Parity Act election made by a lower-tier partnership. The credit resulting from a lower-tier partnership’s SALT Parity Act election passes through to the tiered partner’s partners or shareholders, who may each claim their share of the credit on their own return.

Income Tax Topics: SALT Parity Act, Colorado Department of Revenue, revised April 2025.

Illinois

Corporate, personal income taxes: Federal Employee Retention Credit and IRC Sec. 280C discussed

Illinois issued a general information letter discussing the wage expense deduction disallowed under IRC Sec. 280C if taxpayers claim the federal employee retention credit (ERC). Taxpayers must reduce their federal wage expense deduction by the amount of the ERC in the tax year in which the taxpayer paid the wages. Illinois allows a subtraction from federal taxable income by corporate income taxpayers for the wage expense deduction disallowed under IRC Sec. 280C. Individual income taxpayers can claim a similar subtraction from federal adjusted gross income.

The IRS implemented processes to verify valid ERC claims against potential fraud and abuse. If a taxpayer claimed the ERC but didn’t reduce the wage expense deduction for the same year and the IRS approves and pays the ERC in a later tax year, the taxpayer can reduce the deduction in the year the ERC claim is paid. The taxpayer doesn’t have to file an amended return or an administrative adjustment request for the overstated wage expenses. Illinois will recognize the same process, and a taxpayer can claim a subtraction modification on its state income tax return in the same year. The subtraction modification is subject to verification.

Upon request, taxpayers must provide support that the overstated wage expense was included as gross income on the federal income tax return for the tax year in which the ERC was received by the taxpayer. This support includes documentation that clearly reflects the wage expense deduction and ERC claimed on the original return, the tax year in which the ERC was received by the taxpayer, the amount of the ERC paid by the IRS, and the overstated wage deduction amount included as gross income for the tax year the ERC was received by the taxpayer.

General Information Letter IT 25-0004-GIL, Illinois Department of Revenue, May 6, 2025.

Sales and use tax: Treatment of tariffs discussed

Illinois issued a general information letter discussing the application of sales and use tax to tariffs. The identity of the person legally responsible for paying the tariff under federal law is the critical factor in determining whether Illinois sales or use tax applies to the tariff. Federal importation taxes or “tariffs” aren’t deductible from the gross receipts of businesses or individuals who sell tangible personal property at retail. If the seller is the importer and passes the amount of the tariff on to the customer, it’s part of the selling price. Therefore, the seller must include the tariff in taxable gross receipts. If the customer is the importer, the tariff isn’t part of the selling price for purposes of computing the customer’s use tax liability.

General Information Letter ST 25-0022-GIL, Illinois Department of Revenue, April 7, 2025.

Indiana

Multiple taxes: Department required to establish amnesty program; cigarette and tobacco products tax rates increased

Legislation is enacted that includes provisions to:

Amnesty program

Effective July 1, 2025, the Indiana Department of Revenue is required to establish an amnesty program for taxpayers having an unpaid tax liability for a listed tax that was due and payable for a tax period ending before Jan. 1, 2023. Listed taxes are those that the department is required to collect or administer. A taxpayer can enter into a written payment program agreement with the department for the full payment of the unpaid listed taxes in the manner and time period established in the agreement. The time in which a voluntary payment of tax liability may be made under the amnesty program is limited to the period determined by the department, not to exceed eight regular business weeks ending before the earlier of the date set by the department or Jan. 1, 2027.

The amnesty program must provide that, among other requirements, upon payment by a taxpayer to the department of all listed taxes due from the taxpayer for a tax period, or payment as provided under the agreement, the department will:

Cigarette and tobacco products tax rates

Effective July 1, 2025, the cigarette tax is increased by $2 per pack on cigarettes weighing not more than three pounds per 1,000 and by a proportionate amount on cigarettes weighing more than three pounds per 1,000. Other tax rate hikes include:

P.L. 213, (H.B. 1001), Laws 2025, effective as noted.

Kansas

Multiple taxes: Rate cut authorized, apportionment and exemption changes enacted

Kansas enacted legislation that:

Ch. 123 (H.B. 2231), Laws 2025, effective after publication in the statute book and as noted.

Michigan

Corporate income tax: Business with out-of-city employee could apportion city income tax

The taxpayer had the right to apportion its city income tax even though its only brick-and-mortar location was in the city of Lapeer. The business has an employee in Ann Arbor who is responsible for growing the business and assisting with strategic planning. As his actions aren’t merely solicitation of sales, he is deemed to have conducted out-of-city business activity that establishes the taxpayer’s right to apportion its income.

Vidon Plastics Inc. v. City of Lapeer, Michigan Tax Tribunal, No. 23-002017, April 17, 2025.

Montana

Corporate, personal income taxes: NOL transition adjustment enacted

Montana has enacted legislation to provide a transition adjustment for IRC Sec. 172 net operating loss (NOL) carryovers. The adjustment is the sum of all positive and negative adjustments to a taxpayer’s Montana taxable income resulting from a difference in federal and Montana income tax from before Jan. 1, 2024. If the federal carryover was not the same as the Montana carryover on Dec. 31, 2023, the difference is:

Taxpayers must make this election on their 2024 income tax return filed on or before Oct. 15, 2025, and must include a completed carryforward adjustment form. A taxpayer may file an amended 2024 income tax return to make this election as long as that amended return and the accompanying carryforward adjustment form are filed on or before Oct. 15, 2025. A taxpayer that makes the election must apply the entire carryforward or carryback toward tax year 2024 as a carryforward adjustment until Montana taxable income is $0, and then toward each subsequent year until Montana taxable income is $0 for each subsequent year, up to seven years. The election doesn’t impact the calculation of a new NOL carryover or carryback for tax years after Dec. 31, 2023, and the carryforward adjustment for the NOL carryforward must be used after any NOLs that accrue after Dec. 31, 2023. If a taxpayer fails to make the election by Oct. 15, 2025, then the taxpayer may not make the carryforward adjustment election, and Ch. 503 (S.B. 399), Laws 2021, applies. The DOR may not grant extensions to the Oct. 15, 2025, deadline. The legislation is effective May 8, 2025, and applies retroactively to tax years beginning after Dec. 31, 2023.

S.B. 544, Laws 2025, effective as noted above.

New Jersey

Corporate income tax: Retroactive amendment resolves dormant commerce clause violation

The Superior Court of New Jersey affirmed a tax court decision finding that while the pre-2020 version of a corporation business tax regulation violated the Dormant Commerce Clause of the United States Constitution, a 2020 amendment effectively resolved the constitutional issue retroactively.

The central issue concerns royalties that the taxpayer paid to an affiliated licensing company and whether those royalty payments were properly deducted in calculating that taxpayer’s liability or instead should have been “added back.”

On appeal, the taxpayer argued that the tax court erred in applying the 2020 amendment retroactively. The taxpayer stressed that the adoption of the 2020 amendment recited an effective date of April 8, 2020, many years after the disputed tax years. Also, when litigating the constitutional issues on remand in the tax court, the parties agreed that the 2020 amendments didn’t apply retroactively.

However, the court stated that there are three recognized exceptions to the general principal that new statutes and regulations apply prospectively. The tax court invoked the third exception, that a rule can apply retroactively when the new provision is “ameliorative or curative.” The court determined that the tax court appropriately invoked that third exception.

Lorillard Tobacco Company v. Director, Division of Taxation, Superior Court of New Jersey, Appellate Division - NJSuperCt, Nos. A-0595-23 A-0596-23, April 29, 2025.

Sales and use tax: Treatment of tariff markups discussed

New Jersey has explained that when a seller passes along the cost of a tariff to the consumer/purchaser, the charges are subject to sales tax as part of the taxable sales price. The tariff is subject to sales tax even if separately stated to the purchaser.

Sales Tax Treatment of Tariff Mark Ups, New Jersey Division of Taxation, May 20, 2025.

New York

Multiple taxes: Enacted budget includes middle-class tax cut, adds and revises credits, provides inflation refund, and makes other changes

Enacted as part of New York’s 2025-26 budget package, A.B. 3009 contains a variety of personal income, corporate franchise, sales and use, property, gaming, and other tax changes, including those detailed below.

Inflation refund credit

The law creates a one-time inflation refund personal income tax credit for the 2025 tax year for taxpayers who were full-year residents in 2023, whose income in that year was below a certain threshold, and who were not claimed as a dependent by another taxpayer in that year. Specifically, taxpayers who filed 2023 resident tax returns as married filing jointly or qualifying surviving spouse will receive a credit of (1) $300 if their New York adjusted gross income was more than $150,000 but not more than $300,000, or (2) $400 if their New York adjusted gross income was $150,000 or less. Taxpayers who filed 2023 resident tax returns as single, married filing separately, or head of household will receive a credit of (1) $150 if their New York adjusted gross income was more than $75,000 but not more than $150,000, or (2) $200 if their New York adjusted gross income was $75,000 or less. To the extent the credit is included in gross income for federal income tax purposes, it’s not subject to New York state or local income tax.

Personal income tax rates

Rate reductions are enacted for joint filers with incomes up to $323,200, for heads of households with incomes up to $269,300, and for single taxpayers and married taxpayers filing separately with incomes up to $215,400. The rates are reduced in two phases, with an initial rate cut applicable for tax year 2026 and a second rate cut beginning in tax year 2027. In addition, the law extends the temporary high-income surcharge (i.e., the top rates of 9.65%, 10.3%, and 10.9%) through tax year 2032. Alternative tax table benefit recapture provisions are also included for certain taxpayers.

Empire state child credit

For tax years 2025 through 2027, the law increases the empire state child tax credit by giving eligible families a $1,000 credit for children younger than 4. For children ages 4–16, the credit is $330 for tax year 2025 and $500 for tax years 2026 and 2027. The credit amount is phased down for taxpayers having income over a threshold level. Eligibility for the credit is also expanded to additional taxpayers for those tax years.

Institutional real estate investors. New provisions prohibit institutional investors that own 10 or more single-family or two-family homes and have $30 million or more in assets under management, or the individual owners of such institutional investors, from claiming depreciation tax deductions for those homes. The provisions also generally prohibit such institutional investors, or their individual owners, from claiming interest deductions for the homes, but an interest deduction can be taken with respect to a home that is sold to an affordable housing nonprofit or to an individual buyer who will live in the home. These provisions apply to taxable years beginning on or after Jan. 1, 2025.

Corporate estimated payments

The law increases the threshold at which corporation tax filers are required to make estimated tax payments, from $1,000 to $5,000, for taxable years beginning on or after Jan. 1, 2026.

Federal partnership adjustments

Provisions are enacted to establish reporting requirements for federal partnership audit changes and administrative adjustment requests made under the federal centralized partnership audit regime.

MTA payroll tax

The Metropolitan Commuter Transportation Mobility Tax (MCTMT) is eliminated for self-employed individuals earning $150,000 or less beginning in 2026, but the rate is increased for certain taxpayers. For example, for employers in the counties of Bronx, Kings, New York, Queens, and Richmond, the top rate for certain payroll levels is increased from 0.6 to 0.895%, applicable to tax quarters beginning on or after July 1, 2025. In the counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester, the top rate for certain payroll levels is increased from 0.34 to 0.635%.

Excelsior jobs program

The law extends the excelsior jobs program and also adds semiconductor supply chain projects (i.e., projects aimed at supporting the growth of the semiconductor manufacturing and related equipment and material supplier sector) to the list of eligible sectors of business. Semiconductor supply chain projects are eligible for a benefit of up to 7% for the jobs tax credit component, up to 3% for the investment tax credit component, and up to 7% for the research and development tax credit component. The provisions apply to taxable years beginning on or after Jan. 1, 2025.

Other semiconductor incentives

Two new programs are created, applicable to taxable years beginning on or after Jan. 1, 2025. The semiconductor research and development project program provides a credit of up to 15% of the cost or other basis for federal income purposes on qualified investments. The semiconductor manufacturing workforce training incentive program provides a credit equal to: 75% of eligible wages, training costs, and wrap around services, up to $25,000 per employee receiving eligible training, up to $1 million per eligible non-semiconductor manufacturing business, and up to $5 million per eligible semiconductor manufacturing business.

Employee training incentive program

The employee training incentive program (ETIP) is repealed, effective Dec. 31, 2028.

Organ donation credit

An organ donation tax credit is created for taxable years beginning on or after Jan. 1, 2025, allowing full-year resident taxpayers a refundable tax credit for unreimbursed expenses related to the transplant, including travel expenses, lodging expenses, and lost wages, not to exceed $10,000, in the tax year in which the living human organ transplantation occurs. The existing subtraction modification for organ donation expenses is eliminated.

Other extended and revised credits

A number of existing credits are extended, expanded, and/or revised, including: low income housing credits; credits for the rehabilitation of historic properties; jobs retention tax credit program; film production credits; newspaper and broadcast media jobs program; digital gaming media production credit; musical and theatrical production credit; credit for employing persons with disabilities; clean heating fuel credit; alternative fuels and electric vehicle recharging property credit; hire-a-vet credit; farm workforce retention credit; farm employer overtime credit; brownfield redevelopment and remediation credits; property tax credit; and geothermal energy systems tax credits.

Food and drinks sold through vending machines

The sales and use tax exemption for certain food and drinks sold through vending machines is extended from May 31, 2025, to May 31, 2026.

Local occupancy taxes in the cities of Auburn and Buffalo

The following cities are authorized to impose a hotel and motel occupancy tax up to the indicated rates:

The taxes may not be imposed on a permanent resident of a hotel or motel. For purposes of the authorizations, the term “permanent resident” means a natural person occupying any room or rooms in a hotel or motel for at least 90 consecutive days. The authorizations expire on Dec. 31, 2027.

STAR exemption and STAR credit programs

The income and age eligibility rules for the STAR exemption and STAR credit programs are simplified. Also, eligibility determinations, and the process to protest those determinations, are made consistent for all variations of the STAR program. Specifically, the bill does the following:

Pari-mutuel wagering taxes

The bill amends various provisions related to pari-mutuel wagering taxes in New York. Specifically, the excise tax imposed on any racing association, corporation or regional off-track betting corporation authorized to conduct pari-mutual wagering is 0.7% of all money wagered through such association or corporation.

Beginning with state fiscal year 2026, the aggregate amount of the pari-mutuel wagering tax paid by a harness track in a state fiscal year must not exceed the pari-mutuel wagering tax attributable to live racing handle paid by such harness track in state fiscal year 2024. All pari-mutuel wagering taxes must be collected and remitted in the same manner as such taxes were collected and remitted previously.

Also, breaks are not permitted, unless required by another jurisdiction. In addition, all distributions to the holders of winning tickets must be calculated to the nearest penny. Further, a racetrack may round to the nearest nickel for bets made at the facility. Finally, various pari-mutuel provisions have been extended for an additional year.

All of these pari-mutuel changes are effective Sept. 1, 2025, except as noted.

Lower casino slot machine tax rates

For the period of April 1, 2026, through June 30, 2031, each gaming facility in zone two continues to be subject to the same lower tax rate on gross gaming revenue from slot machines as was imposed in the preceding fiscal year, provided the licensed gaming facility is current on all statutory obligations to New York or has entered into and is in compliance with a repayment agreement with New York. As a condition of the lower slot machine tax rate taking effect April 1, 2026, the licensed gaming facility must provide an initial report to specified people clearly detailing the established quarterly and annual employment goals of increasing full-time employees for each year that the facility will receive a lower tax rate and any substantial changes to the initial plan. This report is due no later than Jan. 1, 2026.

Each gaming facility must continue providing an annual fiscal report detailing the use of the funds resulting from the lowered slot tax rate by January 1st of each year. Such report must include, but not be limited to, any impact on employment levels since receiving the lower slot machine tax rate, an accounting of the use of such funds, any other measures implemented to improve the financial stability of the gaming facility and any other information as deemed necessary by the commission.

At the conclusion of each year, a licensed gaming facility must provide an affirmation in writing to the commission stating whether the required employment goal was either met or not met. If the licensed gaming facility is found to have not adhered to the plan by the commission, then the applicable slot tax rate may be increased by specified percentage points at the discretion of the commission.

Sales and use tax relief for certain limited partners and members of LLCs

The bill revises the relief from sales and use tax liability provided to certain limited partners and members of limited liability companies (LLCs).

Filing of amended tax returns

A technical correction is made to previously enacted 2024-25 budget legislation (Ch. 59 (S.B. 8309), Laws 2024) relating to the filing of amended sales and use tax returns to provide that the provisions apply to returns filed or amended on and after Dec. 1, 2024.

Taxpayer notification and protest rights

The bill clarifies that a taxpayer voluntarily viewing their information, including but not limited to notices, documents, and outstanding balances, on the Department of Taxation and Finance’s online service system doesn’t renew the protest period to challenge the outstanding assessment and override statutorily set limitation periods. Also, written communications related to past-due fixed and final tax liabilities don’t confer hearing rights before the Division of Tax Appeals.

Tax warrants and warrant-related records

The Department of Taxation and Finance is authorized to file all tax warrants and warrant-related records electronically at the Department of State to effect liens and judgments against the real, personal, and other property of tax debtors. Also, the department is required to file a copy of any warrant and/or warrant-related records with the clerk of the county named in the warrant or warrant-related record. In addition, an electronic signature may be used in lieu of a signature affixed by hand. These provisions are effective July 1, 2025.

Ch. 59 (A.B. 3009), Laws 2025, effective May 9, 2025, or as noted.

Corporate income tax: Retroactive application of nexus regulation violated due process

A New York court upheld a corporate franchise tax nexus regulation adopted in 2023 (Reg. Sec. 1-2.10) but held that retroactive application of the regulation was unconstitutional. Taxpayers argued that the regulation conflicted with and was preempted by P.L. 86-272, but that argument was rejected. The court found that the regulation didn’t impose duplicative or unfair taxation on out-of-state sellers engaging in more than solicitation within the state.

However, the taxpayers were successful in claiming that retroactive application of the regulation to 2015 violated their due process rights. Taxpayers weren’t forewarned of the retroactive application, which exposed them to New York income tax liability for time periods when their activities were thought to be exempt from taxation. In addition, the length of the retroactive period was excessive.

American Catalog Mailers Association v. Department of Taxation and Finance, Supreme Court, Albany County, No. 903320-24, April 28, 2025.

Oregon

Corporate income tax: Court upholds partial repatriation amount inclusion in sales factor

The Oregon tax court did reconsider a previous decision concluding that deemed dividends arising under Subpart F must be reincluded in the sales factor for a corporation excise (corporate) taxpayer’s water’s edge group. However, upon reconsideration, the court adhered to the overall conclusions reached in the original order. The court did amend and correct its original order to correct minor errors.

The taxpayer sought reconsideration of Oregon’s proffered adaptation of the “Augusta Formula” when testing for constitutional factor relief. The adaptation essentially extends the Augusta Formula over the nearly 20-year period during which the CFCs accumulated the earnings and profits that were deemed distributed in tax year 2018. The adaptation thus includes the sum of each past year’s Oregon taxable income that would have been due under worldwide combined reporting.

The taxpayer argued the adaptation didn’t fairly represent its income and argued for a different version of the formula. The court disagreed with the taxpayer’s contention that the result of applying the retrospective worldwide comparator was unconstitutionally distortive.

Microsoft Corporation v. Department of Revenue, Oregon Tax Court, ORTaxCt, No. TC 5413, April 29, 2025.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

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